Published on 26 April 2019

SUSTAINABLE FINANCE

Greening the financial system : a new mission for central banks

The fight against climate change can work wonders. It is not only able to transform central bankers into environmental apostles, but also reduces circumspect regulation to concrete considerations of climate-related financial risks. This was demonstrated by the Paris meeting of the Network for the Greening of the Financial System, which brought together 36 central banks.

 

 

From left to right: Mark Carney, Governor of the Bank of England; François Villeroy de Galhau, Governor of the Banque de France; Franck Elderson, President of Network for Greening the Financial System (NGFS) on 17 April 2019.
@Banque de France - Tiffany Bataille

This is a paradigm shift in financial risk assessment. On 17 April, the Network for Greening the Financial System (NGFS), the group of green finance regulators that brings together 36 global central banks, released its report "Call to Action - The Climate of Financial Risk". (1) in a solemn and prestigious setting, the Banque de France. To encourage this change, members of the network arrived in droves.

The message that was delivered cannot be clearer. "If we align ourselves with the 1.5 degrees of warming foreseen by the Paris Agreement, we will have to deal with many transitional risks," said Frank Elderson, chairman of the NGFS and representative of the Dutch Central Bank, adding: "If we are moving towards the 4 degrees so it is the physical risks associated with the serial disasters that we will have to manage! "

Mobilizing all regulators in Africa and the United States

This message was not self-evident just a few years ago. "Look how much has been done in such a short time," said François Villeroy de Galhau, the Governor of the Banque de France, recalling that the network had been launched just eighteen months ago and that today it gathers 36 central banks from 5 continents.

But mobilization work must still continue to create a ripple effect in countries that are currently missing. "We do not have enough African banks in the network," said Sylvie Goulard, Deputy Governor of the Banque de France, referring to the need for NGFS members to make "road shows around the world to explain, explain, and re-explain to those who do not think like us. " At the top of the list, of course, is biggest absence to this international meeting: the FED, the American central bank.

Integrate climate risks into the assessment of financial stability

To convince them, the report lists the best practices already implemented by the most engaged central banks. But the network also formulates recommendations. Organized in three working groups (supervision of economic actors, macroeconomic regulation and greening of the financial sector), the network worked for months to come up with six recommendations.

Four concern central banks:

- Integrate climate-related risks in the assessment of financial stability and micro-supervision.

- Integrate Environmental, Social and Governance (ESG) factors into the management of central bank portfolios.

- Bridging data gaps

- Mobilize skills and develop technical assistance while sharing knowledge in risk assessment.

Two recommendations concern public authorities:

- To obtain solid and coherent information at the international level concerning the climate and the environment.

- Support the development of a classification of sustainable activities.

The call for a sustainable activity classification system and online reporting with the TCFD

NGFS members are aware that they have a long way to go to transform the financial sector. We must rely on two pillars according to François Villeroy de Galhau: "a classification of sustainable activities and reporting obligations in accordance with the TCFD guidelines". The first will open up the possibility of better assessing the risks for activities deemed unsustainable (Brown penalizing factor) and the second will enhance the quality of information on companies' greenhouse gas emissions and the financing granted to them.

The Last step: increasing green financing. While investment needs in the energy sector alone are estimated at $900 billion per year, the issuance of green bonds represented only $100 billion for the whole of 2018. Concerning France, investments in listed green funds amounted to €23 billion, or 1.3% of assets under management. Finance is not yet green but the NGFS hopes to profoundly transform it!

Anne-Catherine Husson-Traore, @AC_HT, directrice générale de Novethic

(1) The report is here


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